HAS THE TRAILER MARKET been experiencing a “soft market” or something much worse?
The answer depends largely on which niche we're talking about.
At Heil Trailer International, boosted by big business in petroleum, crude-oil, and non-code trailers, sales were up 25% through the first seven months of the year and the company is on pace for a record year — just a year removed from setting a record.
“We're just tanks,” Heil marketing manager Bill Harris says. “We have a nice niche. For the most part, it's been protected from some of the pockets of the economy that have struggled.”
On the other end of the spectrum are the companies that specialize in platform trailers — they've been devastated by the collapse of the subprime mortgage market and the sharp decrease in freight traffic. Reitnouer Trailers, for example, has experienced a sales decline of 40%, which has forced a corresponding work force reduction of 40%.
“It's really a tough climate,” president Bud Reitnouer says. “It's not 2001 all over again, but it's not 2006 either. The statistics I saw of the trailer industry as a whole indicate it is really soft.”
Through the first two quarters of 2007, net orders for total trailers were 106,200, down 33%, according to Kenny Vieth, senior partner of A.C.T. Research. Dry van net orders were 56,400 units, down 40%; reefer van orders were 14,000 units, down 26%; and flatbed orders were 13,500 units, down 35%.
He says that with orders down and backlogs falling, build rates — which were cut in the first quarter — were poised to be cut even more in coming months.
“We've seen continued softness in trailer orders,” he says. “We appear to have hit bottom in April, and we've improved since then. We were down by only single digits in May (2-3%) and in June (8-9%). The feel of the industry makes you think we'd be down further.
“The caveat is, if you go back and look at the summer of 2006, in June ‘06 we had 150,000 units of backlog for trailers. Today (early August), we have about 105,000 units, so weak orders were a lot easier to deal with in the summer of ‘06 because the cushion on which the industry was sitting was a lot softer. We have a lot less cushion in the summer of ’07, and every time we have a bad order month, the backlog continues to constrict.
“And typically orders continue to pick up until October, so the industry has to get through August and September, when we would typically expect to see a nice order surge. So the industry is going to be living off the backlog for another three months, so by the time we get to October, the backlog is going to be down somewhere around 85,000-90,000. That's a very thin backlog for the industry to continue building at current levels.”
Tonnage index falling
He says the positive economic reports for the second quarter — business investment snapped back, exports were looking healthy, and real-wage growth was promising — were a mirage. That's because the American Trucking Associations' Truck Tonnage Index fell by 3.4% in June.
Vieth says that trucking companies' profits are “weak,” and their reported earnings are much more consistent with the Truck Tonnage Index than the GDP. And this isn't good for trailer manufacturers.
“The trailer industry is going to depend on whether the economy is growing and truckers are making money,” he says. “If the economy is growing, freight is growing, and you're going to need more trailers to move the freight. You can make the argument that the economy really softened up in the fourth quarter of ‘06 and was very weak in the first quarter of ’07, so there wasn't a lot of economic incentive to buy over the last two or three quarters.
“We found over time that there is a strong correlation between trucker profits and trailer orders. The fact that trucking really started to see profits fall off in the fourth quarter and into the first and second quarters makes truckers somewhat defensive in ordering trailers until they see the economy and their profits improve. And they also bought way too many Class 8 trucks last year. They bought too many just as the economy slowed down, so you ended up with a capacity situation where we had way too many trucks chasing a non-growing amount of freight.
“We saw most of the trailer manufacturing industry pull back pretty hard in production last December. They saw that orders weren't coming in. I think most of the OEMs were fairly aggressive in production cuts through the first quarter. I think we're in race between a dwindling backlog and waiting for orders that are going to come in and prop up the backlog starting in the fourth quarter. So can OEMs maintain their existing build rates until next year's orders start to arrive, or are the orders going to be sufficiently weak so that further build cuts are necessary?”
Vieth says that he is forecasting 240,000 units to be shipped this year, compared to last year's 280,000. That works out to a projected 14% decline.Trailer picture
Here's a look at companies representing a cross section of the trailer industry:
- Vanguard National Trailer.
Sales and marketing coordinator Troy Geisler says production has been cut 10%, but the company's sales are “dead even” with last year's.
“We had a good second half last year, so it remains to be seen if we'll end up the same, but we're projecting we'll be down by less than 5% for the whole year,” he says. “We built 8150 last year and should produce 8000 this year. We're not happy about it, but I'm sure there are some others who wish they had our performance this year. Dry vans year-to-date are down 40% for entire industry. We're basically flat, so that's a big win.
“We're only in our fifth year, so some of the things we face are not the same things that larger manufacturers face. When you have a huge market share, your tendency to follow the economy or the hills and valleys is more true than when you have a smaller market share. Since we're new, we can pick up new customers all the time. If one big customer decides not to buy this year, it doesn't have as big an impact on us as it would on somebody else. We have a little bit of business with big accounts, but we don't have the huge account that can devastate our backlog with one stroke of an eraser. We're presenting our trailer to somebody new every day. That's what great about being young in the business.”
Geisler says Vanguard is building the same trailer for less money than it cost last year. That's because the company took advantage of the less hectic production schedule to make some plant changes, going with more automation. The company bought a new floor jig and is doing more auto-riveting and self-piercing riveting for roofs.
“Those are things you have to do in a down market — put money into the manufacturing facility to decrease your labor and overall costs,” he says. “We all buy aluminum, suspensions, and floors from the same people, so there's not a bunch of money you can take out there. We're working with our vendors to cut costs, whether it be VMI (vendor managed inventory) projects or their prices. We've cut our inventory levels in raw products dramatically. We've cut our costs on material goods through supplier changes and cut our hours by automation.”
The good news is that the company, despite the downturn, is poised to have its fourth-best year ever, according to Bud Reitnouer.
“The first quarter for flatbed freight was horrendous,” he says. “That put the scare in. Now flatbed freight appears to be decent, but customers are worried about buying equipment and then seeing the market slow down again. That uncertainty is holding back the market more than actual freight moving. It was so darned good and all of a sudden, whamo! Freight started slowing down in December. People weren't concerned about it. It took us a couple of months to feel the impact because fleets had things on order. We saw it in February. But now we have a decent stream of orders coming.”
The bad news is that the company had to lay off 40% of workforce, starting in February.
“We spent the last three to four years ramping up and got these people trained,” he says. “That's a one-year to two-year process to get them to know all the different variations of assembling. We had a good crew put together and then we had to start going the other way. A lot of them are hanging in limbo as long as they can because they liked working here and what they were doing.”
Reitnouer says the company was unable to take a look at its processes in the past two years because it was so busy just trying to meet demand. But the slowdown in the first two quarters of this year allowed the company to “implement some streamlining and more efficient operations.”
Harris says that aluminum liquid trailers were up 11% in the second quarter, but on the dry-bulk side, high cubes are slightly down, low cubes are “hurting”, and backlogs are shrinking.
“The bad housing market is starting to spill over to trucking,” he says. “We have definitely seen it in the dry-bulk, low-cube segment, and we're shifting resources to support where the demand is. We're increasing production on one line and reducing it on another. We're not stopping the product line, just reducing it a bit.
“Everybody pretty much realizes what's going on with the housing market and the loan problems. It's going to continue to affect cement trucks and low-cube-type trailers. At first, we thought it'd be regional, with little pockets of growth, but now it appears to be national.
“There are going to be challenges ahead. Hopefully, the economy will recover. We're kind of hoping business investment and some of that building comes back. We think government spending for new roads and construction will continue. There are fair skies ahead on some of the new government programs, but that's a few years down the road.”
- Great Dane Trailers
The company will build approximately 50,000 trailers this year — 10,000 fewer than in 2006 — according to Chris Hammond, vice-president of dealer sales.
He says flatbeds have taken the biggest hit — reflecting A.C.T.'s finding that the market is down 35% — but he says the company will experience a drop in dry vans and reefers.
“It backed up pretty quickly on us,” he says, “and the housing market doesn't show signs of improving later this year like we thought it might. As long as housing is down, our flatbed guys are going to have a tough time, and our furniture haulers are going to have a tough time. GDP grew at less than 1% in the first half, and for the second half they announced an over-3% annualized rate. But I think they'll revise that down.
“Until housing pulls up and the general economy pulls up, we're going to be slower. Business is not awful by any means. It's just slow in comparison to the last couple of years as we ramped up and built more. This year, we'll probably build more than we did three years ago, which was a good year. It'll be a good year in historical proportions, but that's because it was so high and quickly turned around. We'd gradually let air out of the bubble. But it popped on us.
“We look at our rate of manufacturing constantly to keep a satisfactory backlog time because we want to be able to get raw materials in a timely fashion and be able to build trailers when our customers are expecting them. This year, we've actually slowed down plants, sped them up, and then slowed them. It's been such a rocky year. We've gone both ways.”
He says Great Dane has purchased plants during past downturns, but decided during this downturn to purchase equipment and machinery for all nine plants.
- Fontaine Trailer.
Director of marketing Toby Harris says the company hasn't lost any market share, but has experienced a 25% decline in sales in platform trailers — 10% less than the national decline.
“We can't control the downturn,” director of operations Steve Frank says. “We can only control what we do during the downturn. During the downturn, it's an opportunity to evaluate our processes and allow Fontaine to better serve our customers. We said, ‘Let's focus less on day-to-day firefighting and more on what we can to do improve our operations.’
He said a six-person process-approval group has worked on some value-added projects, including the 5S process and kaizen or process-improvement events.
“With kaizen, we identify and eliminate root causes of different quality variations,” he says. “We can identify and eliminate special causes of production cycle-time variations, eliminate any identified waste in manufacturing or administrative processes, and improve customer service. Safety is critical to us. A lot of people pay lip service to it. But it is very important to us. We have a lot of safety-approval employees eliminating unsafe conditions in shop areas. There's been a lot more focus on our certified welder program, certified painter program, and job-rotation program.
Says Harris, “Based on talks with A.C.T. and our dealer network, I don't think we're going to come out of this until the housing correction takes hold in the market. That's the biggest effect on the platform business right now. I don't have a crystal ball, but I don't see it coming back full force until ‘08, and even then, I don't know if it's going to be the first half or second half.”
- Stoughton Trailers
The company announced in July that it would be delaying a layoff of an estimated 1000 employees.
“Due to securing a number of orders, Stoughton was able to avoid a mass layoff,” human resources director Deborah Lee wrote in a July 12 letter. “Unfortunately, however, the market for Stoughton's products remains soft and unpredictable.”
The company had notified the Wisconsin Department of Workforce Development on April 23 that it could temporarily lay off more than 1100 employees no sooner than June 22. Then it filed another letter in July, notifying the state of a potential layoff no sooner than September 14.